[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2018

or

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT

For the transition period from __________ to
__________

Commission file number 33-20111

SPYR, INC.

(Exact name of registrant as specified in its charter)

Nevada

75-2636283

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

4643 S. Ulster St., Suite 1510, Denver,
CO 80237

(Address of principal executive offices)

(303) 991-8000

(Registrant's telephone number)

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days
☒ Yes ☐ No

Indicate by
check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of "large accelerated filer," "accelerated filer" and" smaller reporting company" in Rule 12b-2 of
the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

APPLICABLE ONLY TO CORPORATE ISSUERS

As of April 30, 2018, there were 191,793,398
shares of the Registrant's common stock, par value $0.0001, issued, 107,636 shares of Series A Convertible preferred stock (convertible
to 26,909,028 common shares), par value $0.0001, and 20,000 shares of Series E Convertible preferred stock (convertible to 295,003
common shares), par value $0.0001.

1

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

SPYR, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

March 31,
2018

December 31,
2017

ASSETS

Current Assets:

Cash and cash equivalents

$

78,000

$

86,000

Accounts receivable, net

3,000

4,000

Prepaid expenses

19,000

35,000

Trading securities, at market value

37,000

48,000

Total Current Assets

137,000

173,000

Property and equipment, net

123,000

134,000

Capitalized gaming assets and licensing rights, net

726,000

743,000

Intangible assets, net

11,000

12,000

Other assets

16,000

16,000

TOTAL ASSETS

$

1,013,000

$

1,078,000

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Current Liabilities:

Accounts payable and accrued liabilities

$

929,000

$

878,000

Related party short-term advances

5,000

—

Related party line of credit

1,021,000

—

Current liabilities of discontinued operations

22,000

22,000

Total Current Liabilities

1,977,000

900,000

Non-current related party line of credit

—

807,000

Total Liabilities

1,977,000

1,707,000

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY

Preferred stock, $0.0001 par value, 10,000,000 shares authorized

107,636 Class A shares issued and outstanding

as of March 31, 2018 and December 31, 2017

11

11

20,000 Class E shares issued and outstanding

as of March 31, 2018 and December 31, 2017

2

2

Common Stock, $0.0001 par value, 750,000,000 shares authorized

191,520,892 and 181,128,950 shares issued and outstanding

as of March 31, 2018 and December 31, 2017

19,151

18,112

Additional paid-in capital

50,176,836

46,561,875

Accumulated deficit

(51,160,000

)

(47,209,000

)

Total Stockholders’ Equity

(964,000

)

(629,000

)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

1,013,000

$

1,078,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

SPYR, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

For the Three Months Ended March 31,

2018

2017

Revenues

$

6,000

$

52,000

Expenses

Labor and related expenses

886,000

1,370,000

Rent

49,000

38,000

Depreciation and amortization

29,000

15,000

Professional fees

2,556,000

1,592,000

Research and development

299,000

113,000

Other general and administrative

105,000

334,000

Total Operating Expenses

3,924,000

3,462,000

Operating Loss

(3,918,000

)

(3,410,000

)

Other Income (Expense)

Interest and dividend income

—

3,000

Interest Expense

(20,000

)

—

Unrealized loss on trading securities

(11,000

)

(15,000

)

Total Other Expense

(31,000

)

(12,000

)

Loss from continuing operations

(3,949,000

)

(3,422,000

)

Loss on discontinued operations

(2,000

)

(35,000

)

Net Loss

$

(3,951,000

)

$

(3,457,000

)

Per Share Amounts

Loss from continuing operations

Basic and Diluted earnings per share

$

(0.02

)

$

(0.02

)

Loss on discontinued operations

Basic and Diluted earnings per share

$

—

$

—

Net Loss

Basic and Diluted earnings per share

$

(0.02

)

$

(0.02

)

Weighted Average Common Shares

Basic and Diluted

186,355,488

159,333,637

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

SPYR, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2018

(Unaudited)

Preferred Stock

Additional

Class A

Class E

Common Stock

Paid-in

Accumulated

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Deficit

Total

Balance at December 31, 2017

107,636

$

11

20,000

$

2

181,128,950

$

18,112

$

46,561,875

$

(47,209,000

)

$

(629,000

)

Common stock issued to related party for cash

—

—

—

—

500,000

50

49,950

—

50,000

Common stock issued for cash

—

—

—

—

4,200,000

420

554,580

—

555,000

Fair value of common stock issued for employee compensation

—

—

—

—

1,250,000

125

624,875

—

625,000

Fair value of common stock, options and warrants issued for services

—

—

—

—

4,441,942

444

1,711,556

—

1,712,000

Vesting of options and warrants granted for services

—

—

—

—

—

—

674,000

—

674,000

Net loss

—

—

—

—

—

—

—

(3,951,000

)

(3,951,000

)

Balance at March 31, 2018

107,636

$

11

20,000

$

2

191,520,892

$

19,151

$

50,176,836

$

(51,160,000

)

$

(964,000

)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

SPYR, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the Three Months Ended March 31,

2018

2017

Cash Flows From Operating Activities:

Net loss for the period

$

(3,951,000

)

$

(3,457,000

)

Adjustments to reconcile net loss to net cash used in operating activities:

Loss on discontinued operations

2,000

35,000

Depreciation and amortization

29,000

15,000

Common stock issued for employee compensation

625,000

847,000

Common stock, options and warrants issued for services

1,712,000

1,065,000

Vesting of options and warrants granted for services

674,000

402,000

Vesting of shares of common stock issued for services

—

46,000

Unrealized loss on trading securities

11,000

15,000

Changes in operating assets and liabilities:

Decrease (increase) in accounts receivables

1,000

(3,000

)

Decrease in other receivables

—

100,000

Decrease (increase) in prepaid expenses

16,000

(5,000

)

Increase in accounts payable and accrued liabilities

51,000

43,000

Increase in accrued interest on line of credit - related party

14,000

—

Net Cash Used in Operating Activities from Continuing Operations

(816,000

)

(897,000

)

Net Cash Used in Operating Activities from Discontinued Operations

(2,000

)

(11,000

)

Net Cash Used in Operating Activities

(818,000

)

(908,000

)

Cash Flows From Investing Activities:

Net Cash (Used in) Provided by Investing Activities

—

—

Cash Flows From Financing Activities:

Proceeds from sale of common stock

605,000

—

Proceeds from short-term advances - related party

5,000

—

Proceeds from line of credit - related party

200,000

—

Net Cash Provided by Financing Activities

810,000

—

Net Decrease in Cash

(8,000

)

(908,000

)

Cash and cash equivalents at beginning of period

86,000

3,204,000

Cash and cash equivalents at end of period

$

78,000

$

2,296,000

Supplemental Disclosure of Interest and Income Taxes Paid:

Interest paid during the period

$

—

$

—

Income taxes paid during the period

$

—

$

—

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2018 and 2017

(Unaudited)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Interim Financial Statements

The accompanying condensed consolidated financial
statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations
of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note
disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant
to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2017 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2017 included
herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including
notes, required by GAAP.

In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial
position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of
a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal
year-end results.

Organization

The Company was incorporated as Conceptualistics,
Inc. on January 6, 1988 in Delaware. Subsequent to its incorporation, the Company changed its name to Eat at Joe’s, Ltd.
In February 2015, the Company changed its name to SPYR, Inc. and adopted a new ticker symbol “SPYR” effective March
12, 2015.

Nature of Business

The primary focus of SPYR, Inc. (the “Company”)
is to act as a holding company and develop a portfolio of profitable subsidiaries, not limited by any particular industry or business.

Through our wholly owned subsidiary, SPYR APPS,
LLC we operate our mobile games and applications business. The focus of the SPYR APPS subsidiary is the development and publication
of our own mobile games as well as the publication of games developed by third-party developers.

Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Pursuant to current accounting guidelines, the assets and liabilities of EAJ as well as the
results of its operations were presented in these financial statements as discontinued operations.

The accompanying financial statements have
been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization
of assets and satisfaction of liabilities in the normal course of business, however, the issues described below raise substantial
doubt about the Company’s ability to do so.

6

As shown in the accompanying financial statements,
for the three months ended March 31, 2018, the Company recorded a net loss from continuing operations of $3,951,000 and utilized
cash in continuing operations of $816,000. As of March 31, 2018, our cash balance was $78,000 and we had trading securities of
$37,000. These issues raise substantial doubt about the Company’s ability to continue as a going concern.

The Company plans to expand its mobile games
and application development and publishing activities, such as Pocket Starships and Steven Universe Tap Together, through acquisition
and/or development of its own intellectual property and publishing agreements with developers.

Historically,
we have financed our operations primarily through private sales of our trading securities or through sales of our common stock.
If our sales goals for our products do not materialize as planned, we believe that the Company can reduce its operating
and product development costs that would allow us to maintain sufficient cash levels to continue operations. However, if we are
not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our
operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans.

The ability of the Company to continue as a
going concern is dependent upon the success of future capital offerings or alternative financing arrangements and expansion of
its operations. The accompanying financial statements do not include any adjustments that might be necessary should the Company
be unable to continue as a going concern. Management is actively pursuing additional sources of financing sufficient to generate
enough cash flow to fund its operations through calendar year 2018. However, management cannot make any assurances that such financing
will be secured.

Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions used by management affected
impairment analysis for trading securities, fixed assets, intangible assets, capitalized licensing rights, amounts of potential
liabilities, and valuation of issuance of equity securities. Actual results could differ from those estimates.

Earnings (Loss) Per Share

The Company’s computation of earnings
(loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss)
available to common stockholders by the weighted average number of common shares during the period. Diluted EPS reflects the potential
dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company.
In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds
are used to purchase common stock at the average market price during the period. Shares of restricted stock are included in the
basic weighted average number of common shares outstanding from the time they vest.

The basic and fully diluted shares for the
three months ended March 31, 2018 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class
E – 253,678, Options – 13,740,000, Warrants – 3,600,000) would have had an anti-dilutive effect due to the Company
generating a loss for the three months ended March 31, 2018.

The basic and fully diluted shares for the
three months ended March 31, 2017 are the same because the inclusion of the potential shares (Class A – 26,909,028, Class
E – 150,775, Options – 5,970,000, Warrants – 1,200,000) would have had an anti-dilutive effect due to the Company
generating a loss for the three months ended March 31, 2017.

Capitalized Gaming Assets and Licensing Rights

Capitalized gaming
assets and licensing rights represent costs to acquire trademarks, copyrights, software, technology, music or other intellectual
property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may
obtain the right to use the intellectual property in multiple products over a number of years, or alternatively, for a single product.

7

Significant management judgments and
estimates are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability of capitalized
costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to
be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in the
initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which
could result in an impairment charge. Material differences may result in the amount and timing of expenses for any period if
management makes different judgments or utilizes different estimates in evaluating these qualitative factors.

On October 23, 2017, the Company completed
the acquisition of all assets that refer, relate or pertain to the real—time cross-platform MMO game commonly known and referred
to as “Pocket Starships,” including but not limited to all intellectual property, know how, “urls,” websites,
game engines, game store accounts, prior versions, company names and trade names, business plans, ﬁnancial reports, financial
data, employee data, customer lists, forecasts, strategies, and all other business information; manufacturing or other technical
or scientific know-how, speciﬁcations, technical drawings, drawings, artwork, music, diagrams, schematics, technology, processes,
and any other trade secrets, discoveries, ideas, concepts, know-how, techniques, materials, formulae, compositions, information,
data, results, plans, surveys and/or reports of a technical nature; and software programs (including all forms of code), software
documentation, software development kits, game design documents, and formulae related to the current, future and proposed products
and services, including any additions, enhancements or modifications to the foregoing or derivatives thereof after the date hereof.

As consideration for the acquisition, the Company
issued eight million shares of the Company’s restricted common stock valued at $3,200,000, options to purchase up to eight
million shares of the Company’s restricted common stock valued at $2,452,000 and assumed liabilities of $210,000 for a total
purchase price of $5,862,000. The options are fully vested, exercisable at a price per share of $0.50 and will expire starting
August 31, 2020. The acquisition of “Pocket Starships” was reported as part of capitalized gaming assets and licensing
rights valued at $481,000 based upon discounted cash flows. The difference between purchase price and the capitalized value was
recorded as loss on write down on assets during 4th quarter 2017. The Company amortizes the capitalized cost on a straight-line
basis over an estimated life of seven to ten years.

Further, the options previously issued pursuant
to a purchase option agreement dated June 25, 2016, which provided for the option to purchase up to three million, seven hundred
and fifty thousand shares of Registrant’s common stock, are fully vested and remain in effect in accordance with the terms
of the purchase option agreement.

Also during 2017, the Company capitalized $175,000
pursuant to a licensing agreement for the non-exclusive, limited right to incorporate certain intellectual property (IP) from various
STAR TREK television series in to future updates to and expansions of the Pocket Starships game. The Company estimates that
the IP will have an estimated life of 1.6 years, which approximates the term of the license. In addition, we also acquired the
game titled Battlewack: Idle Lords for $100,000, pursuant to settlement with the game owner and developer. Battlewack: Idle Lords
requires additional development before it can be released.

During the three months ended March 31, 2018,
the Company recorded amortization expense of $18,000. As of March 31, 2018 and December, 2017, the unamortized capitalized gaming
assets and licensing rights amounted to $726,000 and $743,000 respectively.

Software Development Costs

Costs incurred for software development are
expensed as incurred. During the three months ended March 31, 2018 and 2017, the Company incurred $299,000 and $113,000 in software
development costs paid to independent gaming software developers.

Revenue Recognition

In May 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU
2014-09 is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance under
prior U.S. GAAP and replace it with a principle based approach for determining revenue recognition. The core principle of the standard
is the recognition of revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services.

We adopted this new revenue recognition standard
along with is related amendments on January 1, 2018 and have updated our accounting policy for revenue recognition. As expected,
at our current level of revenue, the adoption of this new standard did not impact our financial position or results of operations
operating cash flows.

8

We determine revenue recognition by: (1)
identifying the contract, or contracts, with our customer; (2) identifying the performance obligations in the contract; (3)
determining the transaction price; (4) allocating the transaction price to performance obligations in the contract; and (5)
recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.

Through our wholly owned subsidiary SPYR APPS,
LLC, d/b/a SPYR GAMES, we develop, publish and co-publish mobile games, and then generate revenue through those games by way of
advertising and in-app purchases. The Company’s dedicated mobile gaming applications can be downloaded through the app stores
maintained by Apple and Google. The Company’s cross platform gaming application, which can be played on personal computers,
Facebook and mobile devices, can be downloaded from the internet and Facebook as well as through the app stores maintained by Apple,
Google and Amazon.

We operate our games as live services that
allow players to play for free. Within these games players can purchase virtual items to enhance their game-playing experience.
Our identified performance obligation is to display the virtual items within the game. Payment is required at time of purchase
and the purchase price is a fixed amount.

Players can purchase our virtual items through
various widely accepted payment methods offered in the games, including Apple iTunes accounts, Google Play accounts, Facebook local
currency payments, PayPal and credit cards. Payments from players for virtual items are non-refundable and relate to non-cancellable
contracts that specify our obligations.

For revenue earned through app stores, players
utilize the app store’s local currency-based payments program to purchase virtual items in our games. For all payment transactions
on these app store platforms, the app store remits to us 70% of the price we request to be charged to the player for each transaction,
which represents the transaction price. We recognize revenue net of the amounts retained by the app stores for platform and payment
processing fees.

Recent Accounting Standards

In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process
of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

Other recent accounting pronouncements issued
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future
consolidated financial statements.

NOTE 2 - TRADING SECURITIES

Trading securities are purchased with the intent
of selling them in the short term. Trading securities are recorded at market value and the difference between market value and
cost of the securities is recorded as an unrealized gain or loss in the statement of operations. Gains from the sales of such marketable
securities will be utilized to fund payment of obligations and to provide working capital for operations and to finance future
growth, including, but not limited to: conducting our ongoing business, conducting strategic business development, marketing analysis,
due diligence investigations into possible acquisitions, and research and development and implementation of the Company’s
business plans generally.

The Company’s securities investments
that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading
securities are recorded at fair value based on quoted market price (level 1) on the balance sheet in current assets, with the change
in fair value during the period included in earnings.

Investments in securities are summarized as
follows:

Fair Value at

Gain on

Unrealized

Fair Value at

Year

Beginning of Year

Sale

Loss

March 31, 2018

2018

$

48,000

$

—

$

(11,000

)

$

37,000

9

The following table discloses the assets measured
at fair value on a recurring basis and the methods used to determine fair value:

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

Significant

in Active

Other

Unobservable

Fair Value at

Markets

Observable Inputs

Inputs

March 31, 2018

(Level 1)

(Level 2)

(Level 3)

Trading securities

$

37,000

$

37,000

$

—

$

—

Money market funds

36,000

36,000

—

—

Total

$

73,000

$

73,000

$

—

$

—

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

Significant

in Active

Other

Unobservable

Fair Value at

Markets

Observable Inputs

Inputs

December 31, 2017

(Level 1)

(Level 2)

(Level 3)

Trading securities

$

48,000

$

48,000

$

—

$

—

Money market funds

36,000

36,000

—

—

Total

$

84,000

$

84,000

$

—

$

—

Generally, for all trading securities and available-for-sale
securities, fair value is determined by reference to quoted market prices (level 1).

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

March 31,
2018

December 31,
2017

Equipment

$

28,000

$

28,000

Furniture & fixtures

114,000

114,000

Leasehold improvements

107,000

107,000

249,000

249,000

Less: accumulated depreciation and amortization

(126,000

)

(115,000

)

Property and Equipment, Net

$

123,000

$

134,000

Depreciation expense for the three months ended
March 31, 2018 and 2017 was $11,000 and $12,000, respectively.

NOTE 4 - RELATED PARTY TRANSACTIONS

On
September 5, 2017, the Company obtained a revolving line of credit from Berkshire Capital Management Co., Inc. The
line of credit allows the Company to borrow up to $1,000,000 with interest at 6% per annum. The loan is secured by a first lien
on all the assets of the Company and its wholly owned subsidiary SPYR APPS, LLC. Repayment on the loan is due February 28, 2019.
As of March 31, 2018, the Company has borrowed $1,000,000 and accrued interest of $21,000.

During
the three months ended March 31, 2018, the Company issued 500,000 shares of restricted common stock to the father of an executive
officer of the Company for cash of $50,000.

10

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are involved in certain legal proceedings
that arise from time to time in the ordinary course of our business. Except for income tax contingencies, we record accruals for
contingencies to the extent that our management concludes that the occurrence is probable and that the related amounts of loss
can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. A material legal proceeding
that is currently pending is as follows:

On October 14, 2015, the Company was named
as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc.,
f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible debentures in the aggregate
principal amount of $1,500,000 in 1998. The plaintiff is seeking payment or conversion of said convertible debentures together
with accrued interest and unspecified damages. The Company believes the claim is not a valid debt and is vigorously defending this
lawsuit. On December 4, 2015, the Company filed a motion to dismiss the suit based on the statute of limitations. In evaluating
a motion to dismiss, the Court is only allowed to view the allegations set forth in the plaintiff’s complaint and documents
referenced therein, must assume that those allegations are true, and must construe all evidence contained in the referenced documents
in a light most favorable to the plaintiff. On August 24, 2016, under this standard, the Court determined that the legal requirements
to grant the motion to dismiss had not been fully satisfied and denied the Company’s Motion to Dismiss. Accordingly, no final
determinations regarding liability have been made, the case will proceed to be litigated in the normal course, and, if the Company
elects, it will have the ability to again present its arguments for dismissal prior to trial through a motion for summary judgment,
which will allow for a determination to be made based on a legal standard that is slightly less favorable to the plaintiff. If
that motion is denied, the Company will still have the opportunity to present all of its arguments and defenses at trial, at which
Zakeni will have to prove its case by a preponderance of the evidence. The case is scheduled for trial on October 30, 2018 and
the Company has recorded anticipated litigation and court costs in accrued expenses. Based upon available information at this stage
of litigation, it is still the belief of management and opinion of in-house counsel that the Company will obtain a favorable ruling.
Management does not expect any loss resulting from this lawsuit to be material.

Employment Agreements

Pursuant to employment agreements entered in
December 2014 and October 2015, the Company agreed to compensate three officers with a base salary in the aggregate of $450,000
per year through 2020. In addition, as part of the employment agreement, the Company also agreed to grant these officers an aggregate
of 1.55 million shares of common stock at the beginning of each employment year.

Game Development Agreements

The Company is party to various game development
agreements. Payments are contingent upon the developer(s) meeting specified milestones and game performance. Pursuant to these
agreements, the Company has agreed to pay up to $585,000 during the period from April 2018 through January 2019.

Common Stock To Be Issued

The Company is party to various third-party
service agreements to be paid through the issuance of the company’s restricted common stock. Contingent upon the third parties
providing the agreed upon services, the Company will issue up to 980,116 restricted common shares at various intervals during the
period from April 2018 through February 2019. The shares will be recorded at fair value on the date earned under the respective
agreements.

NOTE 6 – EQUITY TRANSACTIONS

Common Stock:

Three Months Ended March 31, 2018:

11

During the three months ended March 31, 2018,
the Company issued an aggregate of 4,200,000 shares of restricted common stock to third parties for cash of $555,000.

During the three months ended March 31, 2018,
the Company issued 500,000 shares of restricted common stock to the father of an executive officer of the Company for cash of $50,000.

During the three months ended March 31, 2018,
the Company issued an aggregate of 1,250,000 shares of restricted common stock to employees with a total fair value of $625,000
for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed
the entire $625,000 upon issuance. The shares issued were valued at the date earned under the respective agreement based upon closing
market price of the Company’s common stock.

During the three months ended March 31, 2018,
the Company issued an aggregate of 4,441,942 shares of restricted common stock to consultants with a total fair value of $1,712,000.
The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company expensed the entire $1,712,000 upon
issuance. The shares issued were valued at the date earned under the respective agreements based upon closing market price of the
Company’s common stock.

Options:

The following table summarizes common stock
options activity:

Weighted

Average

Exercise

Options

Price

December 31, 2017

13,320,000

$

1.74

Granted

420,000

1.00

Exercised

—

—

Forfeited

—

—

Outstanding, March 31, 2018

13,740,000

$

1.72

Exercisable, March 31, 2018

12,855,000

$

1.61

During the year ended December 31, 2017, the
Company granted stock options to a consultant to purchase a total of 420,000 shares of common stock. During the three months ended
March 31, 2018, the Company renewed the contract for an additional year and granted the consultant an additional 420,000 stock
options with a total fair value of $115,000. A total of 105,000 options vested during three months ended March 31, 2018 while the
remaining 385,000 options will vest through February 2019 at a rate of 35,000 shares per month. The options are exercisable at
$1.00 per share and will expire over 4 years. The fair values of the options are recorded at their respective grant dates computed
using the Black-Scholes Option Pricing Model. During the three months ended March 31, 2018, the Company recognized $52,000 in compensation
expense based upon the vesting of outstanding options. As of March 31, 2018, the unamortized compensation expense for unvested
options was $106,000 which will be over the vesting period.

The weighted average exercise prices, remaining
lives for options granted, and exercisable as of March 31, 2018 were as follows:

Outstanding Options

Exercisable Options

Options

Weighted

Weighted

Exercise Price

Life

Average Exercise

Average Exercise

Per Share

Shares

(Years)

Price

Shares

Price

$0.50

8,000,000

2.42

$0.50

8,000,000

$0.50

$1.00

1,490,000

1.57 – 3.93

$1.00

1,105,000

$1.00

$2.50

1,250,000

.75

$2.50

1,250,000

$2.50

$5.00

3,000,000

1.75

$5.00

2,500,000

$5.00

13,740,000

$1.72

12,855,000

$1.61

At March 31, 2018, the Company’s closing
stock price was $0.395 per share. As all outstanding options had an exercise price greater than $0.395 per share, there was no
intrinsic value of the options outstanding at March 31, 2018.

12

The following table summarizes options granted
with vesting terms activity:

Weighted

Average

Number of

Grant Date

Shares

Fair Value

Non-vested, December 31, 2017

70,000

$

1.00

Granted

420,000

1.00

Vested

(105,000)

1.00

Forfeited

—

—

Non-vested, March 31, 2018

385,000

$

1.00

Warrants:

The following table summarizes common stock
warrants activity:

Weighted

Average

Exercise

Warrants

Price

Outstanding, December 31, 2017

1,700,000

$

1.06

Granted

1,900,000

0.44

Exercised

—

—

Forfeited

—

—

Outstanding, March 31, 2018

3,600,000

$

0.73

Exercisable, March 31, 2018

3,600,000

$

0.73

In January 2018, pursuant to a services agreement,
the Company granted warrants to purchase a total of 1,200,000 shares of restricted common stock with an exercise price of $0.40
and will expire 36 months after date of grant. The warrants are fully vested and exercisable upon grant. Total fair value of the
warrants at grant date amounted to $383,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the
date of grant.

In March 2018, pursuant to a stock purchase
agreement, the Company granted warrants to purchase a total of 700,000 shares of restricted common stock with an exercise price
of $0.50 and will expire March 18, 2023. The warrants are fully vested and exercisable upon grant. Total fair value of the options
at grant date amounted to $234,000 computed using the Black-Scholes Option Pricing Model and was fully recognized on the date of
grant.

The weighted average exercise prices, remaining
lives for warrants granted, and exercisable as of March 31, 2018, were as follows:

Outstanding and Exercisable Warrants

Warrants

Exercise Price

Life

Per Share

Shares

(Years)

$0.01

600,000

2.76

$0.40

1,200,000

2.79

$0.50

800,000

0.58 – 4.97

$1.50

500,000

0.75

$2.00

500,000

0.75

3,600,000

At March 31, 2018, the Company’s closing
stock price was $0.395 per share. As all outstanding warrants had an exercise price greater than $0.395 per share, there was no
intrinsic value of the warrants outstanding at March 31, 2018.

13

The table below represents the average assumptions
used in valuing the stock options and warrants granted in fiscal 2018:

Three Months Ended March 31,

2018

Expected life in years

3.00 – 5.00

Stock price volatility

138% - 153%

Risk free interest rate

2.12 % - 2.65%

Expected dividends

—

Forfeiture rate

—

The assumptions used in the Black Scholes models
referred to above are based upon the following data: (1) the contractual life of the underlying non-employee options is the expected
life. The expected life of the employee option is estimated by considering the contractual term of the option, the vesting period
of the option, the employees’ expected exercise behavior and the post-vesting employee turnover rate. (2) The expected stock
price volatility was based upon the Company’s historical stock price over the expected term of the option. (3) The risk-free
interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying options. (4)
The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and
does not expect to pay dividends to common shareholders in the future. (5) The expected forfeiture rate is based on historical
forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.

NOTE 7 – DISCONTINUED OPERATIONS

Restaurant

Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Pursuant to current accounting guidelines, the restaurant segment is reported as discontinued
operations.

The following table summarizes the assets and
liabilities of our discontinued restaurant segment's discontinued operations as of March 31, 2018 and December 31, 2017:

March 31,
2018

December 31,
2017

Assets:

Accounts receivable, net

$

—

$

—

Inventory

$

—

$

—

Prepaid expenses

$

—

$

—

Property and equipment, net

$

—

$

—

Other assets

$

—

$

—

Total Assets

$

—

$

—

Liabilities:

Accounts payable and accrued liabilities

$

22,000

$

22,000

Total Liabilities

$

22,000

$

22,000

The following table summarizes the results
of operations of our discontinued restaurant for the three months ended March 31, 2018 and 2017 and is included in the consolidated
statements of operations as discontinued operations:

14

For the Three Months Ended March 31,

2018

2017

Revenues

$

—

$

312,000

Cost of sales

—

99,000

Gross Margin

—

213,000

Expenses

Labor and related expenses

—

123,000

Rent

1,000

61,000

Depreciation and amortization

—

15,000

Professional fees

—

—

Other general and administrative

1,000

49,000

Total Operating Expenses

2,000

248,000

Operating Income (Loss)

(2,000

)

(35,000

)

Other Income (Expense)

Loss on disposal of assets

—

—

Income (Loss) on discontinued operations

$

(2,000

)

$

(35,000

)

NOTE 8 – SUBSEQUENT EVENTS

Subsequent to March 31, 2018, the Company issued
an aggregate of 272,506 shares of common stock to consultants with a total fair value of $104,000 for services rendered. The shares
issued are non-refundable and deemed earned upon issuance.

Subsequent to March 31, 2018, on April 20,
2018. the Company signed a convertible promissory note with a third party lender for up to $475,000 (net of original issue discount
of $25,000). The note is for 12 months with interest at 8% per annum on the unpaid principal amount. The note holder has the right,
at any time on or after 181 calendar days after the date of the note, to convert all or any portion of the outstanding principal
and interest into the Company’s restricted common stock at $0.20 per share. On April 26, 2018 the Company borrowed $150,000
on this note.

15

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and supplementary
data referred to in this Form 10-Q.

This discussion contains forward-looking statements
that involve risks and uncertainties. Such statements, which include statements concerning revenue sources and concentration, selling,
general and administrative expenses and capital resources, are subject to risks and uncertainties, including, but not limited to,
those discussed elsewhere in this Form 10-Q that could cause actual results to differ materially from those projected. Unless otherwise
expressly indicated, the information set forth in this Form 10-Q is as of March 31, 2018, and we undertake no duty to update this
information.

Plan of Operations – Through our
wholly owned subsidiary SPYR APPS, LLC, d/b/a SPYR GAMES we develop, publish and co-publish mobile games, and then generate revenue
through those games by way of advertising and in-app purchases. Our primary focus is on the development and expansion of our mobile
games and applications. We anticipate we will need to hire additional employees during 2018 to help with the development and marketing
of existing and future games and applications.

During the past two years we have invested
in the Company’s future by working closely with the development team at Spectacle Games to optimize game play and expand
the availability of our game Pocket Starships to more users through new and existing game portals, social networking sites and
app stores throughout the world. During 2017, we signed an agreement with CBS Consumer Products
that will allow the incorporation of intellectual property (IP) from various Star Trek television series into future Pocket Starships
updates and expansions. Our Pocket Starships development team is already working on expansions of Pocket Starships to include the
Star Trek IP, which we expect will be released during the second half of 2018. In Pocket Starships, players can
build and pilot several ships and forge alliances on their quest for galactic domination. Players can perform or initiate various
activities ranging from fighting pirates to participating in Faction Alerts. With the release of the expansion, those playing Pocket
Starships will be able to explore new sectors and engage in exciting battles with the Borg and will be able to staff their ships
with their favorite Star Trek characters from the Star Trek TV series franchise – including Star Trek: The Next Generation,
Star Trek: Deep Space Nine, and Star Trek: Voyager, through a trading card expansion. In addition, working
together with the development team at Reset Studios LLC, we have developed of a new tapper game to feature characters and storylines
from Steven Universe, a popular animated television series on Cartoon Network. This
new tapper game is currently in the soft launch stage of development and is scheduled to be released
during second quarter 2018.

Management’s plan for the next 12 months
is to build upon this foundation and focus our efforts on marketing and optimizing user acquisition and retention. We will also
continue to provide the monthly advances to Spectacle and Reset for further development, enhancement and maintenance of the games
as needed to meet the needs of the users and maximize revenue into the future. In addition to our plans for Pocket Starships and
the new tapper, we will continue to seek additional games and apps to publish as we strive to broaden our range of products and
increase revenues and operating cash flows. We expect these marketing, development and expansion plans will be financed through
existing cash, operating cash flows from game revenues and other forms of financing such as the sale of additional equity and debt
securities, capital leases and other credit facilities. The Company may also decide to expand and/or diversify, through acquisition
or otherwise, in other related or unrelated business areas if opportunities present themselves.

COMPARISON OF THE THREE MONTHS ENDED MARCH
31, 2018 TO 2017

The consolidated results of continuing operations
for the nine months ended March 31, 2018 and 2017 are as follows:

16

Digital Media

Corporate

Consolidated

Three Months Ended March 31, 2018

Revenues

$

6,000

$

—

$

6,000

Labor and related expenses

81,000

805,000

886,000

Rent

13,000

36,000

49,000

Depreciation and amortization

18,000

11,000

29,000

Professional fees

103,000

2,453,000

2,556,000

Research and development

299,000

—

299,000

Other general and administrative

46,000

59,000

105,000

Operating loss

(554,000

)

(3,364,000

)

(3,918,000

)

Other expense

(6,000

)

(25,000

)

(31,000

)

Loss from continuing operations

$

(560,000

)

$

(3,389,000

)

$

(3,949,000

)

Three Months Ended March 31, 2017

Revenues

$

52,000

$

—

$

52,000

Labor and related expenses

383,000

987,000

1,370,000

Rent

3,000

35,000

38,000

Depreciation and amortization

3,000

12,000

15,000

Professional fees

93,000

1,499,000

1,592,000

Research and development

113,000

—

113,000

Other general and administrative

272,000

62,000

334,000

Operating income (loss)

(815,000

)

(2,595,000

)

(3,410,000

)

Other income (expense)

—

(12,000

)

(12,000

)

Loss from continuing operations

$

(815,000

)

$

(2,607,000

)

(3,422,000

)

Results of Operations - For the three
months ended March 31, 2018 the Company had a loss from continuing operations of $3,949,000 compared to a loss from continuing
operations of approximately $3,422,000 for the three months ended March 31, 2017. This change is due primarily to the issuance
of restricted common stock, options and warrants in exchange for services. During the three months ended March 31, 2018 we issued
5,691,942 common shares, 420,000 options, and 1,900,000 warrants with a total fair value of $3,011,000 compared to 2,810,000 common
shares, 570,000 options, and 1,000,000 warrants with a total fair value of $2,360,000 during the three months ended March 31, 2017.

More detailed explanation of the three months
ended March 31, 2018 and 2017 changes are included in the following discussions.

Total Revenues - For the three months ended
March 31, 2018 and 2017, the Company had total sales of $6,000 and $52,000, respectively, for a decrease of $46,000. This change
is due to the cessation of marketing during the latter part of 2017 and first quarter 2018 for updates and expansion of our existing
games. Management plans to expand its mobile application and game development and monetization efforts and believes the anticipated
updates to Pocket Starships with Star Trek IP and the release two new idle tapper games planned during 2018 will bring increased
revenues in the coming year.

Labor and related expenses includes the
costs of salaries, wages, leased employees, contract labor, and the fair value of common stock and options granted to
employees for services. For the three months ended March 31, 2018 the company had total labor and related expenses of
$886,000 with $255,000 being settled in cash and $631,000 being paid in restricted common stock and vesting of options
recorded at fair value. For the three months ended March 31, 2017 the company had total labor and related expenses of
$1,370,000 with $217,000 being settled in cash and $1,153,000 being paid in restricted stock recorded at fair value. The cost
of labor is expected to increase in conjunction with expansion of the digital media operations.

17

The cost of rent increased $11,000 from $38,000
for the three months ended March 31, 2017 to $49,000 for the three months ended March 31, 2018. The Company leases approximately
5,169 square feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21, 2015 and expiring on
December 31, 2020. Under the lease, the Company pays annual base rent on an escalating scale ranging from $142,000 to $152,000.
Beginning July 2017, we began leasing office space in Berlin, Germany for EUR 3,570 per month through March 31, 2018. The Berlin
office is being used by leased employees hired by the Company for the operation of our Pocket Starships game. Beginning October
17, 2016, we began leasing shared office for one employee in Redmond, Washington on a month to month basis at a cost of $275 per
month per desk.

Depreciation and amortization expenses increased
by approximately $14,000 for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. This increase
is primarily attributable to amortization of the $481,000 of gaming assets acquired during fourth quarter 2017.

Professional fees increased $964,000 from $1,592,000
for the three months ended March 31, 2017 to $2,556,000 for the three months ended March 31, 2018. This increase is Professional
fees during 2018 included the grant of 4,441,942 shares of restricted common stock, 420,000 options and 1,900,000 warrants to purchase
restricted common stock issued to third parties for consulting services, public relations, and other professional fees with a total
fair value of $2,381,000. The remaining $175,000 is due to $137,000 in legal, accounting and other professional service needs,
$29,000 for public relations, and $9,000 in consulting services related to our digital media operations. Professional fees during
the three months ended March 31, 2017 included the grant of 1,560,000 shares of restricted common stock and 570,000 options issued
to third parties for consulting services, public relations and vesting of shares of restricted common stock recorded at fair value
of $1,207,000. The remaining $385,000 is due to $95,000 in legal, accounting and other professional service needs, $245,000 for
public relations, and $45,000 in consulting services related to our digital media operations.

Research and development costs. During the
three months ended March 31, 2018, the Company incurred research and development costs of $299,000 in connection with fees paid
to game developers for the development of its current and soon to be released games, compared to research and development costs
of $113,000 during the three months ended March 31, 2017.

Other general and administrative expenses decreased
$229,000 for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The decrease can be attributed
primarily to marketing costs which decreased by $39,000, travel costs which decreased by $5,000 and various other general and administrative
cost increases.

The Company had interest expense on a related
party line of credit and accrued expenses of $20,000 for the three months ended March 31, 2018. The company did not have interest
expense for the three months ended March 31, 2017.

The Company had unrealized losses on trading
securities of $11,000 for the three months ended March 31, 2018 compared to unrealized losses of $15,000 for the three months ended
March 31, 2017. Unrealized gains and losses are the result of fluctuations in the quoted market price of the underlying securities
at the respective reporting dates.

DISCONTINUED OPERATIONS

Through our other wholly owned subsidiary,
E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,” which was located in the
Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April 2017. Concurrent with expiration
of the lease the restaurant closed. Pursuant to current accounting guidelines, the assets and liabilities of EAJ as well as the
results of its operations were presented in the accompanying financial statements as discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying financial statements have
been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization
of assets and satisfaction of liabilities in the normal course of business.

The Company has generated a net loss from continuing operations
for the three months ended March 31, 2018 of approximately $3,949,000. As of March 31, 2018, the Company had current assets of
$137,000, which included cash and cash equivalents of $78,000, accounts receivable of $3,000 and trading securities of approximately
$37,000.

18

During the three months ended March 31, 2018,
the Company has met its capital requirements through a combination of collection of receivables, the sale of restricted common
stock of $605,000, related party short-term advances of $5,000, and borrowing from a related party line of credit of $200,000,
and through the use of existing cash reserves. Subsequent to March 31, 2018, on April 20, 2018. the Company signed a convertible
promissory note with a third party lender for up to $475,000 (net of original issue discount of $25,000). The note is for 12 months
with interest at 8% per annum on the unpaid principal amount. The note holder has the right, at any time on or after 181 calendar
days after the date of the note, to convert all or any portion of the outstanding principal and interest into the Company’s
restricted common stock at $0.20 per share. On April 26, 2018 the Company borrowed $150,000 on this note.

As previously described, during the past two
years we have invested in the Company’s future by working closely with the development team at Spectacle Games to optimize
game play and expand the availability of our game Pocket Starships to more users through new and existing game portals, social
networking sites and app stores throughout the world. During 2017, we signed an agreement with CBS
Consumer Products that will allow the incorporation of intellectual property (IP) from various Star Trek television series
into future Pocket Starships updates and expansions. Our Pocket Starships development team is already working on expansions of
Pocket Starships to include the Star Trek IP, which we expect will be released during the second half of 2018. In Pocket
Starships, players can build and pilot several ships and forge alliances on their quest for galactic
domination. Players can perform or initiate various activities ranging from fighting pirates to participating in Faction Alerts.
With the release of the expansion, those playing Pocket Starships will be able to explore new sectors and engage in exciting battles
with the Borg and will be able to staff their ships with their favorite Star Trek characters from the Star Trek TV series franchise
– including Star Trek: The Next Generation, Star Trek: Deep Space Nine, and Star Trek: Voyager, through
a trading card expansion.

In addition, working together with the development
team at Reset Studios LLC, we have developed of a new tapper game to feature characters and storylines from Steven Universe,
a popular animated television series on Cartoon Network. This new tapper game is currently
in the soft launch stage of development and is scheduled to be released during second quarter 2018.

The Company will continue to seek additional
capital through the sale of its common stock, debt financing and through expansion of its existing and new products. If
these goals do not materialize as planned, we believe that the Company can reduce its operating and product development costs and
that would allow us to maintain sufficient cash levels to continue operations. However, if we are not able to achieve profitable
operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend
to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able
to obtain such financing on acceptable terms, or at all.

Operating Activities - For the three
months ended March 31, 2018, the Company used cash in operating activities from continuing operations of $816,000. For the three
months ended March 31, 2017, the Company used cash in operating activities of $897,000. Operating activities consist of corporate
overhead and development of our digital media publishing, advertising and gaming operations. Decreases are due primarily to decreases
in cash settled professional fees, game development costs, and other general and administrative expenses partially offset by increased
in rent and cash settled labor and related costs. See the above results of operations discussion for more details.

Financing
Activities - During the three months ended March 31, 2018, the Company sold 4,700,000 shares of restricted common stock
to third parties and one related party for $605,000, borrowed $5,000 from a related party short-term advance and borrowed $200,000
from a related party line of credit. The Company did not have any financing activities during the three months ended March 31,
2017.

The Company expects future development and
expansion will be financed through cash flows from operations and other forms of financing such as the sale of additional equity
and debt securities, capital leases and other credit facilities. There are no assurances that such financing will be available
on terms acceptable or favorable to the Company.

Government Regulations - The Company
is subject to all pertinent Federal, State, and Local laws governing its business. Each subsidiary is subject to licensing and
regulation by a number of authorities in its State or municipality. These may include health, safety, and fire regulations. The
Company's operations are also subject to Federal and State minimum wage laws governing such matters as working conditions, overtime
and tip credits.

Critical Accounting Policies -
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Note 1 to the Consolidated Financial Statements describes the significant
accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but
not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical
accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the
Consolidated Financial Statements.

19

Revenue Recognition

We determine revenue recognition by: (1) identifying
the contract, or contracts, with our customer; (2) identifying the performance obligations in the contract; (3) determining the
transaction price; (4) allocating the transaction price to performance obligations in the contract; and (5) recognizing revenue
when, or as, we satisfy performance obligations by transferring the promised goods or services.

Through our wholly owned subsidiary SPYR APPS,
LLC, d/b/a SPYR GAMES, we develop, publish and co-publish mobile games, and then generate revenue through those games by way of
advertising and in-app purchases. The Company’s dedicated mobile gaming applications can be downloaded through the app stores
maintained by Apple and Google. The Company’s cross platform gaming application, which can be played on personal computers,
Facebook and mobile devices, can be downloaded from the internet and Facebook as well as through the app stores maintained by Apple,
Google and Amazon.

We operate our games as live services that
allow players to play for free. Within these games players can purchase virtual items to enhance their game-playing experience.
Our identified performance obligation is to display the virtual items within the game. Payment is required at time of purchase
and the purchase price is a fixed amount.

Players can purchase our virtual items through
various widely accepted payment methods offered in the games, including Apple iTunes accounts, Google Play accounts, Facebook local
currency payments, PayPal and credit cards. Payments from players for virtual items are non-refundable and relate to non-cancellable
contracts that specify our obligations.

For revenue earned through app stores, players
utilize the app store’s local currency-based payments program to purchase virtual items in our games. For all payment transactions
on these app store platforms, the app store remits to us 70% of the price we request to be charged to the player for each transaction,
which represents the transaction price. We recognize revenue net of the amounts retained by the app stores for platform and payment
processing fees.

Stock-Based Compensation

The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized over
the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined
at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn
the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period
on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option
grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company's stock option
and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free
interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense
is recorded based upon the value derived from the Black-Scholes Option Pricing model and based on actual experience. The assumptions
used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.

The Company also issues restricted shares of
its common stock for share-based compensation programs to employees and non-employees. The Company measures the compensation cost
with respect to restricted shares to employees based upon the estimated fair value at the date of the grant and is recognized as
expense over the period which an employee is required to provide services in exchange for the award. For non-employees, the Company
measures the compensation cost with respect to restricted shares based upon the estimated fair value at measurement date which
is either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn
the equity instruments is complete.

20

Loss Contingencies

The Company is subject to various loss contingencies
arising in the ordinary course of business. The Company considers the likelihood of loss or impairment of an asset or the incurrence
of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated
loss contingency is accrued when management concludes that it is probable that an asset has been impaired or a liability has been
incurred and the amount of the loss can be reasonably estimated. The Company regularly evaluates current information available
to us to determine whether such accruals should be adjusted.

Recent Accounting Pronouncements

See Note 1 of the consolidated financial statements
for discussion of recent accounting pronouncements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management of the Company is responsible for
maintaining disclosure controls and procedures that are designed to ensure that financial information required to be disclosed
in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported within the timeframes specified in the Securities and Exchange Commission’s
rules and forms, consistent with Items 307 and 308 of Regulation S-K.

In addition, the disclosure controls and procedures
must ensure that such financial information is accumulated and communicated to the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other
required disclosures.

As of March 31, 2018, an evaluation of the
effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the
Securities Exchange Act of 1934 (the “Exchange Act”) was carried out under the supervision and with the participation
of our Chief Executive Officer, Chief Financial Officer, and other persons carrying out similar functions for the Company. In making
this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) (Revised 2013) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies. Based on the evaluation
of the Company’s disclosure controls and procedures, Management concluded that during the period covered by this report,
such disclosure controls and procedures were not effective, due to certain identified material weaknesses. These identified material
weaknesses include, (i) insufficient accounting staff, (ii) inadequate segregation of duties, (iii) limited checks and balances
in processing cash and other transactions, and (iv) the lack of independent directors and independent audit committee.

The Company is committed to improving its disclosure
controls and procedures and the remediation of identified control weaknesses. As capital becomes available, Management plans to
increase the accounting and financial reporting staff, add independent directors to the Board of Directors and establish an independent
audit committee. We cannot provide assurance that these procedures will be successful in identifying material errors that may exist
in the financial statements, nor can we make assurances that additional material weaknesses in its internal control over financial
reporting will not be identified in the future.

The Company continues to employ and refine
a structure in which critical accounting policies, issues and estimates are identified, and together with other complex areas,
are subject to multiple reviews by accounting personnel. In addition, the Company evaluates and assesses its internal controls
and procedures regarding its financial reporting as necessary and on an on-going basis.

Because of its inherent limitations, internal
control over financial reporting cannot provide absolute assurance of the prevention or detection of misstatements. In addition,
projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

21

Changes in Internal Controls Over Financial Reporting

The Company has no reportable changes to its internal controls over
financial reporting for the period covered by this report.

The Company will continually enhance and test
its internal controls over financial reporting on a continuing basis. Additionally, the Company’s management, under the control
of its Chief Executive Officer and Chief Financial Officer, will increase its review of its disclosure controls and procedures
on an ongoing basis. Finally, the Company plans to designate, in conjunction with its Chief Financial Officer, individuals responsible
for identifying reportable developments and the process for resolving compliance issues related to them. The Company believes these
actions will focus necessary attention and resources in its internal accounting functions.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

On October 14, 2015, the Company was named
as a defendant in a case filed in the United States District Court for the District of Delaware case: Zakeni Limited v. SPYR, Inc.,
f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible debentures in the aggregate
principal amount of $1,500,000 in 1998. The plaintiff is seeking payment or conversion of said convertible debentures together
with accrued interest and unspecified damages. The Company believes the claim is not a valid debt and is vigorously defending this
lawsuit. On December 4, 2015, the Company filed a motion to dismiss the suit based on the statute of limitations. In evaluating
a motion to dismiss, the Court is only allowed to view the allegations set forth in the plaintiff’s complaint and documents
referenced therein, must assume that those allegations are true, and must construe all evidence contained in the referenced documents
in a light most favorable to the plaintiff. On August 24, 2016, under this standard, the Court determined that the legal requirements
to grant the motion to dismiss had not been fully satisfied and denied the Company’s Motion to Dismiss. Accordingly, no final
determinations regarding liability have been made, the case will proceed to be litigated in the normal course, and, if the Company
elects, it will have the ability to again present its arguments for dismissal prior to trial through a motion for summary judgment,
which will allow for a determination to be made based on a legal standard that is slightly less favorable to the plaintiff. If
that motion is denied, the Company will still have the opportunity to present all of its arguments and defenses at trial, at which
Zakeni will have to prove its case by a preponderance of the evidence. The case is scheduled for trial on October 30, 2018. Based
upon available information at this stage of litigation, it is still the belief of management and opinion of in-house counsel that
the Company will obtain a favorable ruling. Management does not expect any loss resulting from this lawsuit to be material.

ITEM 1A.

RISK FACTORS

Not applicable to smaller reporting companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During January 2018, the Company issued 500,000
restricted common shares pursuant to stock purchase agreements with a related party for cash of $50,000. The Company relied upon
the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

During February, and March 2018, the Company
issued 4,200,000 restricted common shares pursuant to stock purchase agreements with third party investors for cash of $555,000.
The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

During February 2018, the Company issued 1,250,000
restricted common shares as part of the base salary pursuant to employment contracts with two officers of the Company. These shares
were recorded at fair value of $625,000 in the statement of operations and comprehensive income as part of Labor and related expenses
for the three months ended March 31, 2018. The Company relied upon the Section 4(a)(2) exemption from registration provided by
Rule 506(b) of Regulation D.

During January, February, and March 2018, the
Company issued 4,441,942 restricted common shares pursuant to third party service agreements. These shares were recorded at fair
value of $1,712,000 in the statement of operations and comprehensive income as part of Professional fees for the three months ended
March 31, 2018. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.